Headlines March 1, 2001

Japan: 2M lines in 2001

Globespan shipping 16 ports on a DSL chip

2001: US 3M, rest of world 8-10M

Qwest's DLEC going live in DC

Will ending reciprocal comp bring up internet prices?

Editorial: Don't hurt yourself by hurting consumers

How telcos can get more respect

The JDS 3,000 person layoff proved that no one, not even the hottest of optical companies, is immune from the industrywide problems.

• Virata's new Helium 200/210 targets gateways and home voice systems with double ARM cores and integrated ethernet. Their very helpful press release included 23 statements from customers and analysts, including Samsung's comment "Only Virata is able to provide us with the most integrated and cost-effective technology available on the market, along with excellent engineering service and support." Samsung itself has an interesting chip in this space that is make inroads with a very price.

• TI has a new network processor, with a MIPS core, which Terry Riley told us is delivering excellent performance. We'll have an article in a few weeks, "The smart part of the modem: competition for Virata from TI, Motorola, ishoni, VoicePump and especially Samsung"
  
  

• The Wall Street Journal pointed out that US bonds went up 21% in 2000, and the NASDAQ down 39%.
• 98% less money is going into tech stock funds - $100M in January 2001 compared to $9.5B in January 2000, per Lipper in the Merc. But with prices down, this may prove the wisest time to invest - recent buyers of Efficient nearly doubled their money, and there have been opportunites to do even better in many now low-priced DSL stocks. For VCs and private investors, the opportunities are even bigger - some remarkably attractive deals haven't found financing.
  
  

Headlines Feb 22, 2001

• Alcatel's own Voice over DSL
• What the heck is going on at Covad?
• NorthPoint for sale
• Nortel cutbacks - we got the story right by accident
• What Wall Street knows about telecom equipment
• Covad: making line-sharing work
• Copper Mountain's cash gives them time
• TdSoft $20M, Arrival $17M, MegaPath $10M
• ConnectSouth: another one bites the dust
• New Edge: we're cutting back
• Siemens takes Efficient for $1.5B
• Briefs: future demand, forecasts of bandwidth demand, Verizon, Motorola, Citynet's fiber in the sewer, NHC,BellSouth, BroadJump, Alcatel/RC Networks, Virtual Access, DVTel/Infineon, TI price dropping, LSI Logic, Tripath, Legerity, Analog Devices, "There is no consumer choice for DSL in the UK", KPNQwest, highspeed wireless. Maida Chicon, Harold Furchgott-Roth, Kelvin Ko, Netopia/Proxim, Lucent, rapidly falling DSL chip prices

"It just keeps getting uglier and uglier," Ken Hoexter of Merrill Lynch on Covad's problems (WSJ)

Sorry for the delay between issues. We've been working hard, including over 40 interviews trying to understand why SBC, a very smart company, chose to raise DSL prices 25%+ when chip and equipment costs are plummeting. Tuesday issues for SBC and also Centillium's look at Japan's 2M lines in 2001. Meanwhile GTE's fast DSL connection on Kauai, 100 yards from the beach of your dreams,  brought us the news Wiley will publish DSL, A Wiley Tech brief by Jennie Bourne and Dave Burstein in September.  But see us sooner - come to the VoDSL conference in New York (ad below). I'm chairing it and will keep it lively. db

** Fiber?
Get ADTRAN’s new OSU 300 Optical Service Unit. This single, modular device supports voice, data and video over fiber, eliminating excess termination equipment. The perfect  point-to-point solution for inter-building and campus applications, the OSU 300  is now available (at a very attractive price)!
For a free application brief, click http://www.adtran.com/dslp021901 (ad)

Alcatel's own Voice over DSL
Gateway on a 7300 DSLAM card
With a little help from friend TDSoft, Alcatel later this year will deliver a voice over DSL gateway. according to an presentation at a European conference. First targeted at Europe, the goal is to deliver distributed VoDSL right in the telco CO, feeding a local switch. (In the US, Alcatel will continue to work with CopperCom for now, and is in advanced trials at telcos.) Alcatel last year was considering buying a gateway vendor (CopperCom or Jetstream) but the price was too high, so they chose to develop their own product.
    The 7300 is a watershed for the industry, a true "next-generation DSLAM" now becoming the standard unit in the major telcos, where Alcatel has two thirds of the world market. A video grade unit with gigabits of backplane speed, processors and control systems capable of IP quality of service and multicasting, optional test capabilities, and interfaces soon to reach OC-12 and beyond.

** Voice Over DSL - New York - April 24-25.
Windows on the World. Two days not to miss.
13 CEO/CTO's lead an extraordinary group of speakers, including
chipmakers Michael Tzannes CEO Aware, Faraj Aalaei CEO Centillium,
Ron Van Dell, CEO Legerity, Armando Geday CEO Globespan
Loads of interesting extras and new product announcements.
Save 10% by saying you read about it in DSL Prime. Just give Maria Cianflone 312-780-0700 ext.157, mcianflone@acius.net with code T30PRN.
312.780.0700 www.acius.net (ad)

What the heck is going on at Covad?
"We are in no danger of Chapter 11 at all" Covad's Sessums
Chuck McMinn and team built an exciting company, but this second financial crisis implies a tough road ahead. Covad's writing off at least another $50M - and probably much more - when they finish closing their books this quarter. Part of the writeoff is an accounting rule (if a modem is provided as part of a three year contract, the modem income has to be spread over three years.) Another part is Marketing funds advanced to ISPs that have not paid off, and a large part is additional ISP debt, most of which we thought had been dealt with months ago. They are closing 300 of 1900 COs, extending layoffs, and returning trucks to the lessor. They are essentially  writing off much of the Bluestar deal. A few days earlier, Covad played hardball with ISPs, shutting off thousand of customers of Internet Express and DSL Networks, creating permanent fear among customers, terrible pr, and convincing us, before the financial announcement, that the problems were much worse than reported. If Bob Knowling hadn't pushed through the last $500M financing just before he left, the situation would be dire; with the cash on hand, Covad has many months to turn things around, and we hope they do. Fortunately, AT&T, XO, SBC, and others able to pay their bills are bringing in most of the new customers, and Covad reached a businesslike settlement with Flashcom in court. Below, some Covad good news (linesharing is working, and customer self-installs are increasing), and next issues we have an interview with ex-CEO Bob Knowling. (Sorry, no revelations - he continues to like and respect the people he worked with at Covad.)

** SPIRENT COMMUNICATIONS/Hekimian Division presents: ACCELERATING DSL SERVICE ACTIVATION -- what every DSL service provider must know in order to beat the competition and build defensible, profitable market share. Check out our FREE online white paper at
http://www.hekimian.com/html/new_frm.asp?fs=docs/new_artpap_dslsvcactiv.htm today!
(ad)

NorthPoint for sale
Bids coming in for late March
Verizon suit advancing
There are many rumors - but little solid information - about the bidders for NorthPoint, in a process leading up to a court date in late March, the hoped for (but not guaranteed) final resolution. One probably out of the running is NTT/Verio, which is pulling away from DSL. (Will NTT have to take a write-off on their $5.5B purchase of Verio, now clearly worth less than half that?)
     Meanwhile, they've won a ruling their $B plus law suit against Verizon can proceed in California, and recent events have only improved their case. NorthPoint should win the suit if the "material adverse events" were caused by "facts, events, changes or effects that are generally applicable to (A) the data industry, (B) the United States economy or (C) the United States securities markets generally or the Nasdaq Technology Index in particular". Clearly, problems in the data industry played a major role. Lucent, Cisco, and Nortel have also suffered shortfalls that NorthPoint's lawyers will attribute to "problems in the data industry" - an argument whose merits may well remain unclear until years from now in a jury trial. Meanwhile, we're watching Verizon's financial statements. They presumably will have a lawyer's opinion that minimizes their material risk, but the lawyers we've consulted are not sure at all, and a reserve (or a settlement) would be prudent.

** Virata's Next-generation Integrated Software-on-Silicon (ISOS) Platform Delivers Unmatched Performance and Functionality with its New Security and Autoprovisioning Features. The extensive features of ISOS represent more than 400 staff years of software engineering efforts that have been field-proven in more than 3 million DSL and broadband wireless installations. More information at
http://www.virata.com/cgi-bin/frame.pl?RL=/products/isosdesc.htm (ad)

Nortel cutbacks - we got the story right by accident
"CLEC strategy" failed, as Nortel's layoffs demonstrate
We were just referring to DSLAM future sales, but several misread our comment suggesting deeper Nortel trouble, which we were not predicting. We have enough trouble tracking DSL. Turns out, the same reasoning applied to the larger company as well, but we hadn't predicted it.
    John Roth of Nortel is a smart and honest man, who has earned the industry's respect. We believed him  when he told five hundred wall streeters that Nortel would have an exceptional 2001, growing 30%. Last Thursday, he had to accept that he was wrong, and laid off 10,000 employees. The fall speech itself contained enough to anticipate the problems, as we now see in hindsight. He emphasized sales to CLECs, but told us Nortel would no longer finance them. Since CLECs worldwide are short of capital, he was being unrealistic expecting major growth. Apparently also unrealistic were his growth goals for optical networking, the one area the bubble hadn't burst in. Nortel is the last of the telecom giants to accept the problems, which originate in the capital expense cutbacks at telcos around the world.
     Corporate problems, unfortunately, overshadow the remarkable fourth quarter of 2000, and Nortel has now shipped over 600,000 lines of the Promatory DSLAM. Korea Telecom has become a major customer, and they are also shipping to @Link, First Mark, and PLDT in the Philipines. Tokyo Metallic gives them an enormous upside in Japan. Brett Sheppard believes they had 10% of the world market last quarter, and will hold or increase that percentage this year.

What Wall Street knows about telecom equipment
For the last six months, Wall Street has seen projections from telco after telco that capital spending will be relatively flat or down for 2001 and 2002. Qwest, Verizon, SBC (and of course all the competitors) geared up for data and wireless, and are unwilling to up the rate of investment. The result, of course, is equipment sales, especially in the US, also cannot rise rapidly. While individual companies may buck the trend, it was impossible for most major companies to increase sales 20-30%, as many hoped. One by one, sales projections have come down, from Lucent, Cisco, ADC, and now Nortel. Most were inevitable - you can't sell what they won't buy.

** The High Speed Access Forum February 28  March 2, 2001      Tempe, AZ
Featuring participation from more than 20 carriers and enterprise end-users. Debate and discussion on competing high speed access technologies, the future of DSL, what customers really want from their service providers and more. Key presenters: Berit Svendsen, CTO  TELENOR; Justin Aborn, Assistant CTO - Genuity; George Riggins, Director Data Network Engineering - Verizon; Morgan Chase, Senior System Solutions Manager - NOKIA http://www.marcusevansusa.com/HighSpeed.htm (ad)

Covad: making line-sharing work
In nearly 100% of 1600 surviving offices
Linesharing cuts monthly line costs from $10-20 to about $3, and is absolutely essential if there is ever to be any competition for consumer DSL. The FCC ordered it for last June, and after delays it is working well in much of the country, with lines delivered to competitors in less than 5 days in many cases. Because it uses existing lines the problem rate is as much as 70% lower, dramatically driving down the operational cost.
    Covad hoped to be this far along in December, but some areas dragged to February. As they train ISPs and restructure agreements, they are also moving to standard customer install for nearly all consumer sales this spring. These kinds of day-to-day improvements mean the industry's longterm future is bright - despite the painful stories we have to report.

** Be sure to download Paradyne's newly revised DSL Sourcebook.  This award winning book is a comprehensive resource on DSL, and includes an introduction to Service Level Management for DSL providers.  Check it out today at: http://www.paradyne.com/cgi-bin/return?url=page00sbdslp.pl (ad)

Copper Mountain's cash gives them time
Revenues shrink dramatically, and future unpredictable
When times got bad for the industry, a common comment was "The good companies will do fine." This was clearly mistaken. Copper Mountain has delivered some of the most reliable DSLAMs in the world, and given customers (and reporters) excellent support. They've been fiscally prudent, and earned a profit.  Their partner program was so successful, the rest of the industry copied it.
   3Com just sold several million dollars worth of Copper Mountain DSLAMs in an OEM deal, and mPower expanded their purchasing. But the problems of customers like Rhythms, NorthPoint, and JATO cost them much of the quarter's revenue, which McLeod and basement DSLAM orders couldn't compensate for. NorthPoint was acknowledged as the source of the $8M write-off, and inventory/work-in-progress in the tens of millions must be written off. They now need to build international sales, where the market is growing twice as fast as in the US. Paradyne, facing similar problems, has already cut back staff and spending, and is emphasizing international sales - Copper Mountain's conservative financing will give them breathing room to do likewise, and bring a nextgen unit to market.

** Avail Networks' Frontera(TM) access solutions offer superior traffic management and QoS performance for in-building DSL-based convergence applications, enabling new revenue opportunities for service providers.   Follow the link below to access Avail's free white paper covering pros and cons of delivering voice over DSL (VoDSL) services to MTU-based businesses based on alternative deployment approaches.   http://www.availnetworks.com/library/whitepaper_reg.html Contact: David Kamm, dkamm@availnetworks.com <ad>

TdSoft $20M, Arrival $17M, MegaPath $10M
There's still money out there
TdSoft is the early leader in delivering European 5.2 VoDSL, with enormous potential and a deal with Alcatel. Because Alcatel ships more than half the DSLAMs in the world, that deal is transforming the VoDSL market. Founder and CTO Eytan Radian now is building the company in the US - he's one of the most colorful characters in the industry.

Arrival is building a network in California, emphasizing business connections in the areas not well served by Pac Bell. Many feel the industry survivors will be led by companies like Arrival, @Link, New Edge, and IP Communications, if they emerge as the strongest active competitors to the telcos in selected COs.

MegaPath is a business-oriented ISP, where Harry Taxin has emphasized high-quality service from the first, and MegaPath ratings on DSL Reports have always been high.

ConnectSouth: another one bites the dust
Staff gone, operations expected to close
"Another one bites the dust" is our headline, to make the point that industry problems are overwhelming many companies with decent management and hard-working staff. We know the pain of the people whose dreams were denied is very real; some will lose their homes and health insurance. Good companies , not just weak ones, fail in this market, and everyone looks for a scapegoat. But Bob Knowling of Covad, for example, was not a brilliant manager in April and a rube in October. Rather, he was a smart man brought down by industry changes. He's happy to talk, with hindsight, about mistakes he made - but we've yet to meet anyone perfect.

Morgan Stanley funded CLECs in different regions, hoping to duplicate the remarkable early success of Rhythms, Covad, NorthPoint and DSL.net. eAccess in Japan is now growing rapidly, and we hope proves a prudent investment. But nearly a half dozen groups had a similar idea in the US south and southwest, and the result is that all are in trouble. Before the general CLEC collapse, Bluestar's IPO failed and their VCs were temporarily bailed out by Covad (another portfolio company.) Vectris and Darwin followed, and now ConnectSouth, when the next round of funding fell through.

New Edge: we're cutting back
55 jobs lost
Dan Moffat's company is pegged as one of the survivors, but that means he has to make tough decisions along the way. With no more capital in sight, he had to drop 55 more workers (second layoff) as well as temporarily shut down some locations in Florida and Georgia, reducing COs to 500. He's also had to turn down very attractive offers to take over others, including Vitts and ConnectSouth; a very smart banker should find a way to provide him the funding to take advantage of opportunities like that.

In the works is an editorial "Seven realistic steps to increase competition, bring down prices and move toward universal service" One of them will be to bring the price of fiber backbone connections down in rural areas, the main reason Covad, New Edge, and others are shutting down small offices. The marginal cost of a fiber-optic lambda is dramatically less than the fees charged; if there is no competition, then creative unbundling or regulation should be used to reduce monopoly-like prices. Congressmen Tauzin, can you deliver that to your small town constituents?
  
Siemens takes Efficient for $1.5B
Also investing 100M for new DSLAM plant
Mark Floyd gave us the good news "We plan no layoffs, and I as President of Siemens ICN Access solutions expect to continue to lead and grow the company. " Besides a major SBC contract, he's expanding in China and Barzil, where Siemens international experience will help. Floyd added "Urban China is apartment buildings, allowing rapid growth as we've seen in Korea. Telefonica in Brazil l looks to become a major customer." With Deutsche Telecom aiming at millions of DSL lines, Siemens is preparing to serve - and grow worldwide. Efficient is the leader in modems, and their Flowpoint division was critical in early tests of voice over DSL. The bid is 70% above recent trading, but only a small fraction of last year's value.

Briefs:

• Where will the future demand come from? The mantra remains "we have more orders than we can handle", and the installation delays would seem to confirm that. SBC, Verizon and most CLECs still take over a month for most installs, compared to a telco (and cable industry) standard of 3 days, suggesting a backlog. But we believe that overall installation capacity has caught up with demand, with SBC, as we will report next issue, with the capacity to handle 500,000 more orders than they desire in 2001. Similarly, looking closely at order backlogs at CLECs Covad and Rhythms, install backlogs are stable to down. The easy early adapters have been reached in the major cities; we're now in the "post-DSLAM" era, needing DLCs and loop extension to expand the market, and service quality that will inspire customers to want DSL.
• Andrew Odlyzko of AT&T has convinced us we were wrong in our forecasts of bandwidth demand, a key determinant of the equipment you need to purchase today. He's found substantial data that suggest the widely quoted "doubling every 120 days" growth of the internet is overstated by half or more.  That's what we've been hearing reflected in network demand within DSL as well. Even doubling over a year will make typical DSLAMs installed in 2000 obsolete in 4-5 years, but that's better than the 2-3 years we have been projecting. Odlyzko is speaking at the IGI conference Fiber Bandwidth Glut: Fact or Fiction April 18-19, 2001 in Boston
• 540,000 DSL customers was the first highlight of Verizon quarterly financials, 30% below their spring goal but ahead of the 500K they expected in the fall.
• Motorola is splitting its broadband division (the old General Instrument) into two parts, entertainment and networking. Their Streamaster set top is already in use in the Enron/Verizon trials, and they intend to offer DSL versions of the gateways and intelligent home controllers they are selling to cable
• Fiber in the sewer, anyone? Citynet's robots are now at work in Albuquerque, deploying cable.

Deals:

• NHC won a large order for equipment from BellSouth. Like most telco deals, this was a long time in the works, but the potential volume is significant. With 5 North American telcos representing about 80% of the market for DSL equipment, each decision is crucial.
• BroadJump signed SBC, and is close to dominating the market for broadband installation software, with several cable providers on board as well.
• Alcatel will OEM basement DSLAM equipment from RC Networks, which has produced equipment that works well in the field and is priced far below the market. They have $3,000 units that make ideal building starters, while the more exciting products, just coming to market, include voice.
• Virtual Access has won orders from BT and BellSouth for routers, and is optimistic in other telcos. A simple to use test mode, with a graphical user interface, helps end-users and providers determine where the problem is - local machine, local connection, DSLAM, etc. Pete Castleton of Verizon told us last month that the ability to test is proving critical to network reliability, and is a key factor in their equipment decisions.

Products:

• DVTel announced a new Video over DSL system, using chips from Infineon.

Chips:

• TI has been especially aggressive in pricing, competitors claim, but while DSL is strategic to them, the dollar volume is probably not material to their earnings. DSLAM manufacturers (except Alcatel and Siemens) have all dropped their forecasts for 2001 - that's lower growth, not an absolute downturn.
• LSI Logic introduced an 8 port analog front end chip, with good numbers for noise and power.
• Tripath cut a deal for Alcatel's support of their low-powered line driver, one of the first of a new generation that will raise DSLAM port density.
• Legerity (the AMD spinoff) "opened the kimono" at ISSSC with technical details on their high voltage chips that eliminate splitters and combine voice and data.
• Analog Devices, on the other hand, is working to eliminate the line driver entirely, combining it with the analog front end.

International

• "There is no consumer choice for DSL in the UK", Kingston said as they deferred their service till  at least next year, blaming BT.  All the CLECs are looking at business. CLEC Thus, even with the backing of Scottish Power, has had to abandon DSL plans.
• KPNQwest's Jerry Yohananov emailed that DSL "is not a big part of our future strategy". They've cut back from 1600 to 300 planned COs.

Competition:

• Half the companies at Cannes 3GSM conference will be out of business in a year, predicted VC Olav Ostin. Highspeed wireless handsets and customers will be very rare until much later than predicted.

People:

• Maida Chicon now directs Verizon's multicultural marketing organization, the kind of outreach lesser firms will need to develop as the surge of "early enthusiasm" passes. 
• Harold Furchgott-Roth, the FCC commissioner without a television set, has resigned, because "every free-market advocate in government must fulfill his dream of returning to the private sector." Bush now gets to name his replacement, as well as Bill Kennard's.
• Kelvin Ko is the new Asia director for Videotele.com, the Tektronix video server spinoff, which has promised dramatic breakthrus in price/performance for video headends. DSL is barely visible in China, but Videotele's three offices presumably are calling on many prospects. Video growth is slower than expected, because the big telcos are scared of the investment required, after massive losses six years ago. But as costs keep coming down, (and DSL Internet traffic pays much of the infrastructure cost), the economic argument keeps getting better. We think the time is now, although many disagree; we are certain the economics will become overwhelming within a few years, which means every DSLAM or DLC purchased today without sufficient growth capability will prove a mistake over time. There's less than a 7% difference in cost between video-capable DSLAMs and obsolete ones; in the case of the Alcatel 7300, the new model is cheaper, per port, than the old one, but has 10 times the potential capacity.

Stock Market:

• Netopia's takeover by Proxim illustrated the downside of having cash - cash makes you very attractive to a buyer offering stock. But "fully funded until breakeven" is the mantra of today's successful net company. That's one reason Wall Street is abandoning Amazon; their cash runs out late this year, with no profit in sight.
• Lucent's downgrade to near junk bond status is a frightening reminder of how fragile the Internet and telecom boom really was. The DSL division continues to do well, with growth expected in 2001. The SEC investigation is surprising, but is another warning audited statements are not always accurate, especially as things change. Management hoped that DSL, like optical, would be spared layoffs, but the corporate problems are now so severe nothing can be guaranteed.
• Several analysts asked us about the impact of rapidly falling DSL chip prices on stock prices, which we are reluctant to forecast. Virata seems the least effected, as they emphasize features beyond the standard, but no one else is likely to be immune from an earnings hit, especially in Q2. (Since many chips are sold under contract, spot prices don't always have an immediate effect.) But ADI, Aware, and others have already seen severe stock drops, so don't read this as a sell recommendation, please. (In fact, since we wrote this several DSL chip companies have seen their stock rise.)

In the works:

• Japan: 2M lines in 2001
• Sprint's 2000 COs could make them the largest DLEC; Lucent Stingers in 1200 offices, but only 60,000 customers before 2002
• Telcordia's software delays and Project Pronto
• Elastic Networks - a different technology, a longer reach
• Catena - price breakthrough to add DSL to older DLCs
• CWA's remarkable challenge to telco data accuracy
• CISPA attacks SBC on content control
• What's up with Project Pronto and software delays
• Broadband Bill of Rights and a genuine consumer movement
• VoDSL articles from AFC, Aware, and Copper Mountain.

Headlines Jan 17, 2001

• NorthPoint will emerge - with new owners
• DSL Yearend US ~ 2.4M, Korea 2M
• Rhythms cuts 450+
• $300M U.S. Government DSL contract
• Winfire - Systems good enough to sell
• Actelis: too fast to be true?

• Briefs: Nortel, T1E1.4, Qwest, 2Wire,Netopia, General Bandwidth, Broadcom, Japan fiber, Mark Emery, Doug Broad, Jef Raskin, Genuity

• Stockholders, and employees with options, will get little or nothing unless the bondholders and other debtors are paid in full.
• Goldman Sachs Credit Partners, CIT/NewCourt, CIBC, Credit Suisse and a syndicate have apparently provided $140M of financing, payment of which depends on the offers in bankruptcy court.
• Copper Mountain has reserved $8M and Netopia $1M in case they are not paid by NorthPoint. All ordinary creditors, including the landlord, are not guaranteed payment.

• Brett Sheppard of Nortel just sent an email that we were wrong when we wrote "Nortel has no way to meet sales goals through CLECs", and we questioned Nortel's (and Lucent's) expectations for CLEC sales. He replied "You're off the mark This week's announcement is part of an ongoing effort to focus resources on high-growth businesses." He gave us some facts that suggested how well Nortel was doing, including the IMAS/Promatory DSLAM internationally. We'll have more next issue, when we know how much is on the record. But we believe international CLECs will have to cut back as well, and note that Versatel just decided to hold off on DSL in England and France. The difficulty in depending on CLEC business was confirmed by an industry CEO. "Let's face it, the CLECs have failed, and we need ILEC business," he had emailed a few hours earlier. Neither he nor we believe, of course, that all CLECs will fail - but we think it will be very hard to build a Nortel-sized business by concentrating on CLECs. We now expect less than explosive CLEC growth, but hope Nortel, and others, prove us wrong.
• Thanks to Mark Peden, who was the first to point out we called the T1E1.4 committee by the wrong last number.
• We agree with J., who wrote us T1E1.4 committee is the right place to develop a standard to minimize repeater interference. But we strongly disagree with J's conclusion the telcos should wait before beginning testing of repeaters. Between 15% & 30% of the US is not being served because of a distance problem; SBC is legally committed to universal service, and that is good business for the other telcos as well. Telcos have every reason to support research and begin testing, the sooner the better. If the telcos - 90% + of the likely customers - don't get involved now, the products may prove uneconomical to develop, and too risky to invest in.

• Qwest signed a deal with NorthPoint and New Edge to charge $4.89/month for shared lines.
• Folks at 2Wire, returning jubilant from winning awards at CES, came back to discover more than two dozen colleagues laid off, presumably because ISPs are taking their time about actually ordering gateways from anyone. Brian Hinman says it was a very hard decision, but "Better to do a layoff with plenty of cash in the bank than wait until you don't have any." They have $20M on hand.

• Netopia TER/XL is an add-in security module designed to do IPSEC and Triple DES at line speed for $399. They also introduced
• General Bandwidth announced the GenView Element Management System, to control their VoDSL networks.

• Broadcom announced the BCM5840, a single chip IPSEC security processor that can run at  2.4 Gigabit per second. The price of VPNs is due to come down.

• Japan will go to fiber, rather than DSL, according to Sony's Idei. DSL Prime, despite our name, agrees fiber is the right decision for an affluent nation, and believes the US telcos are making a mistake not moving to it faster. But we have strong confirmation that several hundred thousand lines of DSL equipment are on order in Japan, and suspect that Japan will also grow rapidly in DSL, at least for several years.

• Mark Emery, from Lucent AGS and Carrier Access, is now SVP for R&D at CopperCom, and Steve Gaynor is VP for market development.
• Doug Broad moved from Lucent to Celox Networks, where they are working on an switch designed to handle 6 million simultaneous connections.
• Jef Raskin's "The Humane Interface" went into a revised 3rd printing, and is now available in six languages. Since he left Telocity, he reports having "more consulting requests than I can take" and now a column in Forbes ASAP.

• J.P. Morgan and Salomon Smith Barney were forced to postpone a $2B Genuity offering, which received unattractive ratings. Backbone providers have also not been kindly treated by the market - imagine the Genuity price if PSI is used as a comparable.

Headlines Jan 15, 2000

• Standing ovations at Kennard's last hurrah
• ADSL works fine at 24,000 feet - with a repeater
• Share that DSLAM! The Judge says unbundle
• Sue the bankers!
• Casualties: Darwin, Nortel's CLEC strategy, Bazillion, Motorola CopperGold 

• Briefs: Verizon ISP pricing, Covad, Rhythms, Apple's new DVD writer, Sharegate, 2Wire, Motorola, Copper Mountain,  HarvardNet,  Alcatel, Avaya/Paradyne, Telocity, Nokia Norway, Rhythms Canada, France Telecom, NorthPoint, Esat, Thailand, Michael Gulett, Richard Borbon, Jack Reily, Phil Anshutz, Redback

“We must bring the benefits of the Digital Age to all Americans, from the business districts to the barrios; from those with every advantage to those with disabilities; from the young to the old; from suburban enclaves to the rural heartland.”  Bill Kennard. Others talk about serving everyone - he worked hard to deliver it, and will be badly missed.

NorthPoint faced a January 11 deadline for an absolutely essential loan. Because they released no news, we fear the worst. Say it ain't so, Liz!

We also have confirmed several major DSLAM manufacturers have lowered their production forecasts for the first half of 2001. In addition, with chips in good supply, selected customers, especially in Asia, are being offered much better deals. The industry is still growing rapidly, but not at the extraordinary pace some expected. We will have more details when we have on-the-record sources.

Two items from last week require correction. We did not mean to suggest Efficient had lied to Wall Street, as might be inferred from the way we wrote an article about five companies that disappointed investors. It was bad editing and simply a mistake. We may also have had some facts wrong about Verizon's pricing to ISPs, with a note in briefs below, but we're waiting for details.

San Jose's SUPERNET this week look to be an interesting show, from the SUPERCOMM people. We'll miss it, but will attand DSLCon Global in Hawaii early in February, and visit San Francisco mid February as well. Say hello to the round fellow with a beard and the irrepressible Jennie Bourne.

DSL works fine at 24,000 feet
Tracy Starnes using Symmetricom repeaters at Chester Tel
Starnes, Assistant Plant Engineer, lives 24,000 feet away from the nearest connection, an AFC remote terminal, so he took the opportunity to beta test the new unit. He's getting 3.9M downstream and 492K up, in a binder with 100 pair and other DSL connections. One happy user, of course, is not the same thing as a rigorous trial. We're optimistic the technology will prove out, if not necessary this particular unit, because Stanford Professor John Cioffi (who invented DMT coding) and T1E1.3 stalwart Tom Starr both think ADSL repeaters can work. We are amazed the telcos aren't jumping in to test the equipment; based on our understanding of the bill of materials, this or 2Wire's similar unit would be affordable in telco quantities. In many cases, it should avoid the need for a DLC.

SBC & the FCC can't ignore the Telecommunications Act
Judge Silberman insists on resale of DSL
The court says the law is clear: DSL should be subject to the same rules that require the telcos to share services. Unbundled elements and resale of telco services are likely new tools for competitors as an Appeals court orders incumbents to share all facilities  - presumably including DSLAMs - and offer their services at wholesale rates. Judge Silberman found that separate subsidiaries were not sufficient to bypass the Act. Rather, the subsidiaries were "successors or assignees" of the telcos, and regulated.
    Nothing's likely to change until after months or years of appeals and proceedings. Under the law, the FCC can "forebear" from requiring unbundling, but that would require a finding of public interest, inherently implausible as a waiver would reduce competition and presumably raise prices. Telcos will argue they will be inhibited from investment in broadband if required to share, but that's unsustainable on the facts. Telcos throughout the world are investing in DSL whether or not they are given a protected monopoly, because they project DSL will be profitable as an additional service offered by incumbent carriers. It's a no-brainer for a telco to do 60-80% DSL coverage.
     The FCC cut a deal with SBC to allow the Ameritech merger to go through. The FCC got a commitment that SBC would provide broadband to every customer in their territory - a universal service commitment fulfilling public policy. SBC also promised to compete in thirty markets across the US, and accepted several other goals. In return, the merger went through and they got the monopoly they wanted on certain DSL services. But Silberman called the deal "legal jujitsu", and vacated it.
    Judge Silberman is a conservative Republican who appointed Ken Starr and is unlikely to be over-ruled by the Supremes. His wife's "Independent Woman's Forum" led the attack on Bill Clinton. Arch-conservative Richard Mellon Scaife provided $450,000 to fund IWF, described by the Boston Globe "In the marketplace of ideas, from the national news media all the way down to local radio, the IWF has shown its real strength... [The] IWF is well on its way to becoming the foremost media nemesis of the feminist movement"

Sue the banker!
Log On America goes after Credit Suisse for $100M
Companies are going broke because they counted on the next round of funding being there, and the internet takedown has killed that dream. Entrepreneurs are adults, responsible for their own decisions, but it is incredibly seductive when the financial experts from Morgan or Goldman look you in the face and assure you they will be able to raise hundreds of millions for you. Company after company is failing today, having expanded too much, and raised too little capital, usually relying upon assurances from the best and brightest of Wall Street. Many will be cheering LOA for striking back, even if their chances resemble Don Quixote's. Rarely do bad judgements on Wall Street give rise to successful suits, and "malpractice" standards do not apply. Fine print in contracts protect the investment firm against even the most egregious mistakes. Fine print doesn't always hold up in consumer cases, but businessmen raising millions presumably are bound by every clause. LOA has additional claims of Credit Suisse self-dealing (their subsidiary apparently took most of the issue), and DSL Prime has not examined the case closely enough to report on its merits.
     But whatever the merits, many are cheering on the "little guy" against the banks, who always make convenient targets.

Tears and standing ovations for Kennard
He cried as staff and reporters cheered
Bill Kennard is the most extraordinary individual we've met in telecommunications, with integrity that withstands severe tests. At a Credit Suisse conference this spring, he followed Nacchio, Whitacre, and a dozen other very smart CEOs and analytically outclassed them all. They all looked at the effect of industry trends; he instead looked at how underlying changes would create new trends. He'll stay in Washington, in a special program sponsored by the Aspen Institute. His immediate priority is "to get some rest and spend some time with my 10-month-old baby who really needs a little bit more of my time." Reed Hundt, his predecessor, found remarkable opportunities after leaving office, and we hope the same will be offered to Bill Kennard.

Casualty List:
Darwin: $91M September wasn't enough to keep them out of Chapter 11
Vulcan Ventures - Paul Allen - was one of the investors that doubled up their bet on regional DSL provider Darwin, and Pat Mulloy was promoted to CEO with a turnaround order. They cut more than half the staff, shed healthcare and kiosk divisions, and focused on basement DSLAMs and commercial customers. Cisco is owed $15M, and Tut $3M, per Bill Wolfe of the Louisville Courier-Journal. Elastic Networks had been a major supplier, but they were not referenced in the news article and UBS reports they had cut their exposure.
Vendors "CLEC strategy" is failing, as Nortel's layoffs demonstrate
Joe Roth, Nortel's CEO, replied "We're not interested in customers who have trouble paying their bills" when we asked him about troubled CLECs. But beneath the top management level, his company's main strategy in telephony equipment has been to increase sales among the CLECs, most of whom are struggling at best. Short of taking more financing risks (they have $100's of millions at stake in companies like Log on America and already faced major writeoffs at Prism/Comdisco), Nortel has no way to meet sales goals through CLECs. Facing that reality made this week's layoffs almost inevitable. Lucent is in a similar bind, still aggressively courting CLEC sales with diminishing return and increased risk, although Lucent's Stinger DSL unit is optimistic about avoiding the worst.
Bazillion strands 5,000 in Seattle
Saturday, suddenly 5,000 folks found themselves shut down, in some cases also losing phone service provided as part of a bundle. Hicks, Muse  did not deliver an expected financing round, and with no money the company suddenly shut down, recommending folks contact Speakeasy or Covad directly.
Motorola CopperGold Chipset
It was probably the most exciting of the early DSL chipsets - if they could deliver what they promised. The brochures were gorgeous, and the specifications excellent. Unfortunately, the final product was so late they won very few customers, and now are discontinuing development. Motorola has a separate group that is producing DSL soft modems - maybe they believe the customer side won't need chips at all. They also cut 2,500 employees today.
Chapter 11 isn't the end
Smart lawyers know that if trouble is inevitable, filing Chapter 11 as early as possible is usually the right move. But companies fear the stigma, and go to great lengths to avoid it, typically wasting the assets that would give them a chance to emerge. The court and the law tend to strongly favor the debtor, in the hope of allowing recovery. Debts are frozen, which means payables are deferred while receivables roll in, giving a quick cash hit. Contracts can be abrogated, such as colos, network backbone, or obligatory investments. Flashcom, for example, looks to be winding up its affairs and liquidating; if it had moved earlier to the 11 filing, with more cash in hand, it would have had six months or a year to recover.
Jump.net absorbed into Allegiance
They were feisty, leading the price drops amongst ISPs and being the first to rail against both telcos and CLECs who didn't live up to service promises. But 15,000 customers are not enough to be economical in today's climate, so they accepted an offer from national mega-CLEC Allegiance.

Briefs:

• Pete Castleton of Verizon wrote that ISPs are actually getting a better deal in the new pricing, and that our report, and source, were inaccurate. The intent of the new pricing was definitely an improvement in the ISP deal, he added, and the handful adversely affected would be assisted. We're sure the facts he's giving us are accurate, and we suspect the discrepancy is because we're comparing today's margins against margins offered a year ago, before the merger and some price changes. We suspect the problems we reported developed later in the year, but we missed the changes before this article. Errors help no one, which is why we sent the source article (from the respected DSL Reports) to Verizon for comment before we wrote.
• Covad still has an ISP problem, with one-third of lines classified non-revenue, despite the good news of good news of 274,000 lines in service, (half business and half consumer.) Only 3 percent were sold direct, which explains Covad's latest 400 layoffs and virtual dismantling of the $200M BlueStar acquisition. 17,000 line shared lines proved that program is finally moving. But payment problems now affect 92K lines and 19 ISPs, four of whom filed for bankruptcy. Because of ongoing disputes with the ISPs, most have not joined the "Safety Net" program.  Until Covad comes to settlements with the ISP, it's impossible to calculate the ultimate fiscal effect, or whether even larger provisions will be needed.
• Rhythms in Massachusetts won the right to place line cards in Verizon DLCs, split lines with others besides Verizon (if the customer, for example, buys local service from AT&T), and have lines conditioned without charge.
• Demand for bandwidth will probably be stimulated as more users have the practical means to store videos. A step towards that future came with Apple's new DVD writer, included in the top line model and available for less expensive units. David Pogue reports Compaq is the next customer for the Panasonic built DVD writer. More backbone, anyone?
• Pleasanton, in the East Bay, is the home of Sharegate's new California office.
• CES “Best of Show” for Home Data Networking went to 2Wire, showing their new 802.11b wireless gateway. 2Wire has inspired the industry with the promised extra video and commerce features of their box. Cayman has shipped more units, however, and folks like Sharegate and Broadband Gateways are also close to market. Thompson, Sony, Panasonic, and Motorola have products coming as well. The result is prices coming down (including a large drop from 2Wire.) 
• Some HarvardNet customers were left stranded when Verizon cut off the lines before the date HarvardNet had reported to customers.
• DSL.net is looking to rapidly build its customer base, buying some from Exario (which is focusing on large VPNs instead) and participating in Covad's SafetyNet.

• Copper Mountain dramatically extended the possibilities of their DSLAMs with the 12 port CopperEdge T1 Line Card, designed to enable service beyond SDSL limits. List price is $9,995.
• Motorola's StreamMaster 5000 set top box was another hit in LasVegas. Enron/Blockbuster is using it for the Video on Demand trials in New York and the West Coast. The trials are small, but the partners (Verizon, SBC, Covad among them) have the potential for a massive deployment after the kinks work out. Missing, however, are most movies; Blockbuster hasn't been able yet to persuade Paramount to join in widely, although they are both parts of Paramount. The music folks are supporting Napster, now - Divx and other compression will make movies easy to copy as well, and it's time for the studios to get their heads out of the sand.

• Alcatel continues to win new business from Telus & BellCanada, who have installed over 200,000 lines of DSL.
• DSL, contrary to previous assertions, needs security, and not just a casual warning on the web page. SBC has made a deal to distribute McAfee software, while Sprint is selling Norton. Telocity instead uses the Nortel/Shasta central system to provide a firewall, and charges users an extra $10 for bundle with security and home networking.
• Avaya told us they entered a new partnership with Paradyne after a careful evaluation found the GranDSLAM particularly easy to install and manage.
• Telocity first intrigued us because their plans were to be much more than "yet another ISP", planning a home connection with advanced video and networking features, plans deferred as they built the ISP. They just announced a visionary move, working with Inari on a home network over AC power lines. Sprint also sees home networks as a crucial part of the service, delivering a HomePNA system today and announcing a wireless one for the near future. 

• Nokia won the DSLAM contract from Telenor of Norway.
• Rhythms Canada has DSLAMs in 127 central offices, with 1,300 subscribers in Toronto, Montreal, Ottawa and Hamilton.
• France Telecom's Wanadoo began an aggressive new sales campaign.
• Bilsa began video over DSL trials in Ankara, Turkey, with mPhase equipment.
• NorthPoint, short of cash, sold its half of a Canadian joint venture to partner Call-Net for $5.3 (U.S.). Liz Fetter was very clear about the cause of the sale. “Verizon dealt us a crippling blow when it unexpectedly terminated our binding merger agreement six weeks ago, which we believe was a breach of Verizon’s agreements with NorthPoint." Our analysis of the suit last week was that no one could be certain until the jury came back, but each step like this raises Verizon risk of consequential damages. On the other hand, we have no signs whatsoever that Verizon is seeking to settle, or that NorthPoint can hold out long enough for the case to come to trial.
• Esat, Irish Independent, is testing DSL with the hope of offering service starting in April. Incumbent Eircom is one of the last of the EC companies to unbundle, and rates for competitors are generally prohibitive,
• Lenso DataCom and United Broadband Technology are now serving hundreds of customers in Thailand.

• Michael Gulett, president and COO, has left Virata. The announcement gave no details on his new position, nor did it include the usual gracious statement from someone leaving "to pursue other career opportunities".
• Richard Borbon, was the IDSL product manager and helped launch NorthPoint IDSL in all LEC territories, seeing the IDSL business grow from 3% of total lines to about 25%. Now he's the Product Manager, Broadband for PCTEL. He's working on the host signal processor-based (software) V.90/ADSL combo PCI card, and hopes the soft modem allows bundled DSL to become standard equipment on new PCs.
• Jack Reily joined Efficient as EVP, corporate development, and Clyde Musgrave As CTO as Bruce Brown builds his team.
• Phil Anshutz, controlling Qwest stockholder, just bought most of the debt of Regal Cinemas, and looks to take control. Qwest is the most logical buyer of a DLEC, because they intend to build a $3B national CLEC and have the best use of the equipment and colos. Joe Nacchio agreed with this conclusion, but replied "the price can go even lower" when we asked if they would buy Rhythms, Covad, or NorthPoint. He (and others) are presumably looking at such a cutrate deal, paying off the bondholders in part and the stockholders minimally. A deal like that (including a chapter 11 filing) is the most plausible result if a big DLEC runs out of cash, but we cannot confirm NorthPoint is about to announce such a deal, as rumored.

• Solomon Smith Barney pointed to Rhythms and Teligent as potential problems for the banks owed money.
• January 10  CIBC downgraded Redback, and the same day Robbie Stephens raised their rating. We're glad not to have make a call, because Redback's future depends on the success of the new optical equipment, just starting to ship, and we have no idea how to value a new product in a new market. The current subscriber management units have been remarkably widely accepted, but subscriber management is becoming a feature of other network equipment.
• UBS Warburg lowered estimates for Cisco, ADC, and Nortel telecom sales, confirming our conclusion at top that DSLAM sales growth has slowed, although we do not have information on the same companies.

Headlines Jan 5, 2000

• SBC's 200 COs in BellSouth and US West
• Soft modem at Vegas interoperability demo
• Who makes money as products become commodities?
• Investor Relations 101 - Don't lie to Wall Street
• Verizon price increase to batter ISPs
• @Link's big Winstar deal

• Briefs: Earthlink, Broadcom, Alcatel and ADI chip leaders, Agere/Lucent Microelectronics Linux, LSI Logic/Datapath, Billy Tauzin, Mike Powell, Blair Levin, T. Curtis Holmes, Next Level Denver, Everest Broadband 50M, SBC/Prodigy

"NorthPoint is on the brink of disaster in a life-or-death situation.'' Barry Sullivan, NorthPoint's attorney, reported by Bloomberg

NorthPoint decision time is at hand. Cash on hand will run out within weeks. Between Friday and Wednesday NorthPoint will either receive $160M from a temporarily blocked credit line with Goldman Sachs, CIBC, CSFB and a consortium of lenders or face imminent Chap 11. NorthPoint is supplying weekly cash numbers to the banks and paying $575,000 for Ernest & Young and Shearman & Sterling to document to Goldman that the terms of the line of credit have been met, and the funds must be released. Copper Mountain this morning lowered income, because of fear of NorthPoint non-payment. The Verizon lawsuit is still arguing jurisdiction, and unlikely to help in time.

    Meanwhile, NorthPoint is spending more money on T-3's and other network expenses than they are receiving in revenue. They could drop virtually the entire headquarters, eliminate interest payments and still be cash-negative for the year.  The business must get cash. We hope they make it: honorable outfit, and the longterm fundamentals remain attractive.

SBC's 200 COs in BellSouth and US West
What will they do with NAS COs?
NAS is worth a fraction of SBC's $150M investment, so they just received 200 COs as a sweetener for converting into near worthless stock. Most of these are in major business markets - NAS planned 500 COs in 2001 in cities including Atlanta, Miami, Memphis, Louisville, New Orleans, Seattle, Phoenix, and Denver. Whitacre convincingly asserted this Spring that  SBC intended real nationwide deployment, not just a minimal satisfaction of Ameritech merger requirements, but they've done virtually nothing before now. NAS was promised SBC business in Verizon territory, where they have 500 operational COs but fewer than 10,000 customers. Officially, SBC can tell us nothing about plans for the spaces "all we're saying now is that we are still determining how best to use them". SBC general policy is to tell the press as little as possible for a public company. The pr people are cordial, but we wonder about a corporate strategy that amounts to making press coverage as difficult as possible.

Soft modem at Vegas interoperability demo
DSL Forum proves everyone can work together
70% of modems in new computers are primarily "soft modems", using the system processor rather than a dedicated DSL chip. That's clearly the future - 5 or 7 years from now, DSL modems will probably be built in and minimal hardware. Motorola is bringing that closer, with a sample unit that passed interoperability testing at the University of New Hampshire and is included in the DSL Forum CES demonstration. Standards this time are higher than at SUPERCOMM in June, with more extensive testing, but the results are the same - the equipment works together, and the show demo is truly impressive. Also big at the show will be home gateways (2Wire is showing wireless and voice, Motorola the set top box used by Enron/Blockbuster for VOD, and way more we'll report next week as the show announcements come in.
Who makes money as products become commodities?
Soft modems will reduce the DSL chip market substantially in several years (PC Tel is also close), but we believe the key business issue in 2001 will be competitive pressure dominates. A worldwide chip shortage held back supply, but UMC now takes big ads in EET promising fab capacity now. So margins will predictably erode as prices come down, while every vendor who doesn't want to sell at rock-bottom prices needs to differentiate. There are differences in reach in chips and modems, which increases the number of customers served, and of course some vendors give better support and prove more reliable. But everyone is struggling up the food chain to gateways, voice, integrated functions, and the like, as the prices of ordinary equipment are likely to plummet. Great for the consumer and DSL provider, allowing an increase in volume. It's too early to predict whether larger sales will make up for slimmer margins.

Investor Relations 101 - Don't lie to Wall Street
Even the best of analysts (and journalists) are highly dependent on management's projections, although we try to watch customers, suppliers and the industry as well. Journalists rarely lose their job for poor forecasts, but analysts do. Anything that makes them doubt management's full disclosure scares them, and hurts the company more than the bad news itself. Carrier Access shot themselves in the foot even more dramatically, releasing bad news 8 p.m. Friday before the holiday. One top analyst downgraded them heavily, assuming if they were burying news, there was even more to hide. BellSouth and SBC took hits a few weeks ago around their lowered projections because the explanations when implausible. (Increasing DSL shouldn't cost BellSouth that much, while being behind in Ameritech region construction is a typical ordinary problem, not a special one-time item.) The result: much of the street is coming to believe, as we do, that telco earning growth in the teens is unlikely, and management will have more shortfalls to explain.

Verizon price increase to batter ISPs
GTE outsold BellAtlantic because of ISP ties
Verizon will impose an increase systemwide on ISP charges, which will be especially acute in GTE territory. Two-thirds of GTE's subscribers had come from outside ISPs, a key reason GTE had twice as many DSL customers as the much larger Bell Atlantic, whose efforts were 70% short in 1999 and 30-40% short in 2000. The new prices will be as high as $35 for a service that Verizon sells itself, including ISP charges, for $40, according to DSL Reports. Like Bell Atlantic's previous pricing, it favors Verizon's data subsidiary and AOL, while effectively putting out of business most of the competition. The margins provided their data sub are twice that offered the average ISP - an effective way to promise open access in DC but not deliver it. We are disappointed that FCC leaders, well aware of the situation, have chosen to fight other battles.

@Link's big Winstar deal
Telco quality ATM backbone wins big voice deal
"We're now fully funded through 2001" a happy Monish Kundra reports, as Winstar's  Bill Rouhana wrote us " VPN capabilities will help us lower our costs in serving off-net customers and focus more on driving on-net business. @Link is a well-funded new player with a management team that understands the local communications marketplace. " Alex Good, once senior at Bell Atlantic, leads that team. They've built heavily in Ameritech, with ambitions beyond, but like so many have had to cut back in the last few months. Winstar has recently raised the better part of $B, as Credit Suisse doubled up its investment and Microsoft came along, and looks to save money buying long term capacity, creating a virtual IRU with attractive asset accounting.
     Winstar did a through investigation of deliverable VoDSL, and told us that reliability was critical to them. We've been wondering since the spring "what ever happened to VoDSL", as none of the big players have moved in; a vote of confidence from Winstar would have been a strong endorsement. We hear rumors that the VoDSL equipment itself is proving out well in the field, but the DLEC networks are not sufficiently robust, but have not been able to confirm that.

Briefs:

• Kudos to Mike Lunsford of Earthlink, who gave a straightforward and honest answer when the Contra Costa Times inquired about local service problems. "It's a funky problem that we have our hands around, and the problem is in its death throes," Lunsford said. "We almost have it whipped. We will find a way to reimburse all of the customers who have been affected. This is entirely on Earthlink's shoulders." Customers prefer honesty, we believe, not the typical deceit and fingerpointing typical of service problems. We've personally recommended Earthlink, not least because our own service has gone done once in six months - when a telco tech cut the line. Netopia, Earthlink, and Covad have proven rock solid for us.

• Broadcom Corp introduced for CES a single-chip digital set-top box. Their purchase of E-14 will help them move from cable to DSL, and many of their large cable box customers have been eyeing the DSL market.

• Year end DSL chip sales will show Alcatel with a major lead, and ADI is probably second. Globespan is the largest of the independents, and the most visible.
• Linux support in home gateways is the latest offering from Agere/Lucent Microelectronics. Ucentric Systems of Massachusetts is the first customer announced.
• LSI Logic/Datapath introduced a combined analog front end/line driver that operates at 5 volts and has very low noise. It's 14 bit linear and -160 dbm, excellent performance for the $12-14 price quoted. But we are very skeptical of LSI's claim this will increase servable homes by 30%, because other sources of noise in most environments are more significant. We'll wait for field results, although we predict a 10-20% total increase in reach from multiple technologies.

• Billy Tauzin took the Chair of the House Commerce Committee, with particular close ties to BellSouth and other telcos. The New York Times reported he "raised millions of dollars and threw lavish parties at the Republican National Convention" to get the job. The end of reciprocal compensation is step one, and bills to eliminate FCC review of long distance are likely from the committee.
• Mike Powell received support from John McCain, chair of the Senate committee that would confirm him if he chooses to take the FCC chairmanship.
• Blair Levin, former FCC chief of staff, joined Legg Mason, who have a strong telecom analysis group.
• T. Curtis Holmes from Lucent takes over as COO of Metasolv.

• Where and how will Motorola recognize its $6B loss on Next Level stock , or SBC its several hundred million on its investment? Presumably, buried on the balance sheet - but in Moto's case, that's enormous in proportion to reported earnings.
• Next Level surprised with lower sales and a writedown of inventory, but UBS Warburg reports Qwest is installing VDSL in parts of Denver, and we've previously reported Qwest's Nacchio comment that he expects to move heavily in VDSL when Motorola delivers the next generation of equipment in mid-year.
• Everest Broadband, a New Jersey BLEC, raised $50M from Philly utility Exelon, Pequot Capital and Softbank. They are looking to buy competitors.
• SBC added three captive board members at Prodigy, and provided a $100M line of credit. SBC now has a consumer deal with Prodigy, separate business deals with NAS and Covad ($600M), and 200 of their own COs out of district.

Dec 29, 2000

What if NorthPoint beats Verizon?
Covad, NTT ready for Japanese breakthrus
British Telecom/Teradyne: testing adds customers
VersaPoint deal killed by NorthPoint's $ woes
"Covad will face a class action suit"
Old FCC blocks Verizon LD in Mass for competition
Casualty list - some fatal

•      JATO "We are terminating service in all locations shortly
• Westell warns on sales
• ECI cutting 300 as IPOs flounder
• Picus: Nokia financed the equipment, but no one paid for operations
• Digital Broadband drops 450 people
• Maverix.net, DSL.net, Merrill Lynch, Intel

Telocity/Hughes to become giant DSL ISP
Inadequate service costs Telia 3G wireless license
The AOL settlement - an editorial

•       Make history by opening access to content     
• Prevent discriminatory pricing locking out competitors

Briefs: Rhythms, Verizon, longrun telco financial crunch, consumer DSL needs volume, Ameritech slowdown, Covad's cheap business service, Symmetricom testing, BellSouth & Sprint fiber going home, Nebraska Central Telephone, Westell's modem is a mini-router, iMagicTV/Advanced Fibre, Alcatel 7300, Jetstream/Pine Tree, Accelerated/Siemens/Winstar, Paradyne/Sierra Telephone, MegaPath/Telocity, Iceland, Telecom Italia, France Telecom, RCN cutting, AT&T $2B loss on @Home, Tioga, line driver power coming down, Proxim/Virata HomeRF. Chartered Semiconductor, Ron Cates, Mike Borsetti, Mark Housman, Dave Farber, ITXC, analyst's clash on telco prospects, Ciena/Cyras and Redback's challenges, Hawley's Gluon, VoDSL in New York, Netopia's cash trove

Subscribe your colleagues - just reply to this email and say "sub xxx@zzz" or send a note to subs@. It's free.

"Poof! Smart investment ideas go up in smoke, as market tumbles. Uncontrollable, indefatigable, unreasonable, outlandish exuberance" Wall Street Journal

Enjoy your holidays, and sorry for an issue that's long even after we dropped the ads at the end. We've been on hold, confirming the facts on Verizon/NorthPoint.

Verizon, late November, was facing a $400M loss if they completed the NorthPoint deal - and a contract that did not give them a clear way out. DSL Prime believes they gambled that a weakened NorthPoint could not defeat them in court - or at least that the case would drag on for years without affecting them directly. But if the jury believes they wiggled improperly, the sky's the limit on damages. (Long article at end).

DSL subs in the US will end 2000 at 2.2 or 2.3 million. Korea will be way 1.5M, and the rest of the world is racing to catch up in 2001. That's 400% growth this year, and it will more than double in 2001. DSL remains a great industry and great place to work, despite financial problems.

SBC's $20B market drop last week dwarves even a $B judgment. DSL delays were a small part of the explanation. We could pretend to be prophets, having four days earlier told a NY Times reporter about the underlying pressure on telco finances, but that was just a coincidence. We've amplified below our August analysis, that telephony is a slow growth business and aspiring to double-digit returns cracks the system.

A correction: Rhythms deferred paying a dividend, it did not default. Karen Breen's letter below.

Covad, NTT ready for Japanese breakthrus
41% Covad owned ACCA key NTT partner
"Our Japanese customers are ordering like mad!" Laurie Falconer of Centillium writes. (They have the first chips appoved for Japan's "Annex C" standards, designed to minimize ISDN interference.) Few homes are lit so far, but competition is getting fierce enough that NTT just dropped prices 20% for DSL. They also been ordered to reduce charges 20% for lines to competitors, and line share costs almost in half to $3 or less. Sumitomo has a new DSLAM, Xpeed is selling modems to eAccess, Siemens is delivering DSLAMs to Right Access in Tokyo, and Sony is leading All Planning, a $300M webcaster. The fewer than 10,000 customers at the beginning of 2001 will be hundreds of thousand by yearend - possibly more. Prices are settling at Yen 5,000-7,000, about 20% more than the US, but a great bargain compared to former ISDN rates. (10 million subscribe to ISDN, whose rates are dropping dramatically.)
Tokyo Metallic and eAccess have ambitious plans to install DSLAMs, but the volume leader undoubtedly will be telco NTT, which sells DSL to retail customers through NTT Communications. NTT Communications will offer one plan reselling NTT East and West DSL services, but in most major cities will emphasize a slightly cheaper plan from ACCA, owned 41% by NTT and 41% by Covad, which is supplying operations support. Along with hundreds of thousands of customers, that affiliation connects Covad with NTT, which invested $5.5B to buy Verio to expand its US base. Affiliate NTT Docomo is also a major AT&T investor.

Teradyne: testing adds customers
13% more customers, 20% fewer problems
British Telecom has ordered $6M of Teradyne test equipment after a large trial proved testing saves money. It also prevents angry customers, saves reputations, and is essential for mass deployment. The best way to solve the "DSL Hell" image problem is to reduce installation difficulties, and testing the lines to prevent problems is a key step. Teradyne's Celerity works from the CO, and is one of a new generation